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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
_____________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-25965
______________
j2 GLOBAL COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0371142
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6922 Hollywood Boulevard
Suite 500
Los Angeles, California 90028
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(Address of principal executive offices)
(323) 860-9200
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(Registrant's telephone number, including area code)
______________
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
As of April 15, 2004, the registrant had 23,158,610 shares of Common Stock
outstanding.
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j2 GLOBAL COMMUNICATIONS, INC.
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4
Condensed Consolidated Statements of Cash Flows (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
Index of Exhibits 20
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31,
2004 2003
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ASSETS
Cash and cash equivalents $ 46,989 $ 46,882
Short-term investments 6,446 8,539
Accounts receivable,
net of allowances of $343 and $239, respectively 7,509 5,877
Prepaid expenses and other current assets 2,833 2,571
Deferred income taxes 6,426 10,004
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Total current assets 70,203 73,873
Long-term investments 13,944 8,408
Furniture, fixtures and equipment, net 6,305 6,594
Goodwill 15,616 15,616
Other purchased intangibles, net 7,466 2,320
Other assets 284 329
Deferred income taxes 6,046 5,716
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Total assets $ 119,864 $ 112,856
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LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,984 $ 4,010
Deferred revenue 5,104 4,698
Current portion of long-term debt and capital leases 530 1,022
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Total current liabilities 9,618 9,730
Long-term debt and capital leases 335 221
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Total liabilities 9,953 9,951
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Stockholders' Equity:
Common stock, $0.01 par value. Authorized 50,000,000 at
March 31, 2004 and December 31, 2003; total issued and
outstanding 23,158,610 and 23,090,582 shares at March 31, 2004
and December 31, 2003, respectively 250 249
Additional paid-in capital 128,090 127,483
Treasury stock, at cost (4,643) (4,643)
Note receivable from stockholders, net of allowance of $21 (9) (9)
Accumulated deficit (13,777) (20,175)
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Total stockholders' equity 109,911 102,905
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Total liabilities and stockholders' equity $ 119,864 $ 112,856
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See accompanying notes to condensed consolidated financial statements
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J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended March 31,
2004 2003
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Revenues:
Subscriber $ 22,062 $ 14,454
Advertising 761 612
Licensing and Other 119 142
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22,942 15,208
Cost of revenues 3,640 3,010
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Gross profit 19,302 12,198
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Operating expenses:
Sales and marketing 3,779 2,510
Research, development and engineering 1,050 1,026
General and administrative 4,482 3,468
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Total operating expenses 9,311 7,004
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Operating earnings 9,991 5,194
Interest and other income, net 186 74
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Earnings before income taxes 10,177 5,268
Income tax expense 3,778 235
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Net earnings $ 6,399 $ 5,033
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Net earnings per common share:
Basic $ 0.28 $ 0.23
Diluted $ 0.25 $ 0.20
Weighted average shares outstanding:
Basic 23,121,054 22,291,340
Diluted 25,564,338 24,697,258
See accompanying notes to condensed consolidated financial statements
-4-
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Three Months Ended March 31,
2004 2003
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Cash flows from operating activities:
Net earnings $ 6,399 $ 5,033
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,028 919
Compensation in exchange for note reduction 43 43
Tax benefit of non-qualifying stock option exercises 369 203
Deferred income taxes 3,248 --
Decrease (increase) in:
Accounts receivable (1,237) 341
Interest receivable (17) (18)
Prepaid expenses 374 243
Other assets (295) (91)
(Decrease) increase in:
Accounts payable (59) (1,644)
Deferred revenue 399 279
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Net cash provided by operating activities 10,252 5,308
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Cash flows from investing activities:
Purchase of investments (3,443) --
Purchase of furniture, fixtures and equipment (319) (300)
Proceeds from sale of equipment -- 73
Acquisition of a business, net of cash received (6,020) (175)
Purchase of intangible assets (74) --
Proceeds from notes receivable, net -- 9
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Net cash used in investing activities (9,856) (393)
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Cash flows from financing activities:
Issuance of common stock under employee
stock purchase plan 114 90
Exercise of stock options and warrants 124 1,257
Repayment of long-term debt and capital leases (527) (310)
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Net cash (used in) provided by financing activities (289) 1,037
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Net increase in cash and cash equivalents 107 5,952
Cash and cash equivalents at beginning of period 46,882 32,777
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Cash and cash equivalents at end of period $ 46,989 $ 38,729
========== ==========
See accompanying notes to condensed consolidated financial statements
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J2 GLOBAL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
j2 Global Communications, Inc. ("j2 Global" or the "Company") is a Delaware
corporation founded in 1995. The Company provides outsourced, value-added
messaging and communications services to individuals and businesses throughout
the world. It offers fax, voicemail and email solutions, unified messaging &
communications services, document management solutions and conference calling
services. j2 Global markets its services principally under the brand names
eFax(R), jConnect(R), JFAX(R), eFax Corporate(R), jBlast(R), eFax BroadcastTM,
PaperMaster(R) , ConsensusTM, M4 InternetTM, ProtoFax(R) and Electric MailTM.
The consolidated financial statements include the accounts of j2 Global and
its direct, indirect, domestic and international wholly-owned subsidiaries. All
inter-company accounts and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements and
related financial schedules are unaudited. The Company's interim condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") including those for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X issued by the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and note disclosures required by GAAP for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these condensed
consolidated financial statements. These consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended December 31, 2003 included in the Company's Annual
Report on Form 10-K filed with the SEC on March 15, 2004.
The results of operations for these interim periods are not necessarily
indicative of the operating results for the full year or for any future period.
STOCK SPLIT
On August 5, 2003, the Company's Board of Directors declared a two-for-one
stock split effected in the form of a stock dividend, payable August 29, 2003 to
shareholders of record on August 18, 2003. All share numbers and per share
amounts contained in the accompanying financial statements and related notes
have been retroactively restated to reflect this change in the Company's capital
structure.
NOTE 2 - ACCOUNTING FOR STOCK OPTIONS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations to account for its
fixed plan stock options. These interpretations include FASB Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25", issued in March 2000. Under this method,
compensation expense is generally recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. The
Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which is an amendment to SFAS No. 123.
These statements establish accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123 and SFAS No. 148, the Company has elected to continue to
apply the intrinsic value-based method of accounting described above.
The Company accounts for option grants to non-employees using the guidance
of SFAS No. 123, as amended by SFAS No. 148, and Emerging Issues Task Force
("EITF") No. 96-18, whereby the fair value of such options is determined
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using the Black-Scholes option pricing model at the earlier of the date at which
the non-employee's performance is complete or a performance commitment is
reached.
Under the intrinsic value method, no compensation cost using the intrinsic
value method has been recognized for stock option grants in the accompanying
financial statements. If the fair value-based method had been applied in
measuring stock compensation expense under SFAS No. 123, as amended by SFAS No.
148, the pro forma effect on net earnings and net earnings per share would have
been as follows:
Three Months Ended March 31,
2004 2003
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(In thousands, except per share data)
Net earnings, as reported $ 6,399 $ 5,033
Add: Stock based employee compensation expense included
in reported net earnings, net of related tax benefits -- --
Deduct: Stock based employee compensation expense
determined under the fair value-based method for all awards,
net of related tax effects (488) (402)
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Pro forma net earnings $ 5,911 $ 4,631
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Basic net earnings per common share:
As reported $ 0.28 $ 0.23
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Pro forma $ 0.26 $ 0.21
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Diluted net earnings per common share:
As reported $ 0.25 $ 0.20
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Pro forma $ 0.23 $ 0.19
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NOTE 3 - USE OF ESTIMATES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of net revenue and expenses during the reporting period. On an ongoing
basis, management evaluates its estimates, including those related to revenue
recognition, allowances for doubtful accounts and the valuation of deferred
income taxes, long-lived and intangible assets and goodwill. These estimates are
based on historical experience and on various other factors that management
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standard Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires that variable interest
entities be consolidated by a company if that company absorbs a majority of the
entity's expected losses, receives a majority of its expected residual returns,
or both, as a result of holding a variable interest. In December 2003, the FASB
issued FIN 46R, which made certain amendments to FIN 46. The Company does not
have any variable interest entities and the adoption of FIN 46 did not have a
material effect on the Company's financial condition, results of operations or
liquidity.
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NOTE 5 - CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company's subscriber revenues substantially consist of monthly
recurring subscription and usage-based fees, which are primarily paid in advance
by credit card. In accordance with SEC issued Staff Accounting Bulletin No. 104,
"Revenue Recognition", which clarifies certain existing accounting principles
for the timing of revenue recognition and classification of revenues in the
financial statements, the Company defers the portions of subscription and
usage-based fees collected in advance and recognizes them in the period earned.
Additionally, the Company defers and recognizes subscriber activation fees and
related direct incremental costs over a subscriber's estimated useful life.
The Company's advertising revenues primarily consist of revenues derived by
delivering email messages on behalf of advertisers to the Company's "Free"
advertising-supported customers. Revenues are recognized in the period in which
the advertising services are performed, provided that no significant Company
obligations remain and the collection of the resulting receivable is reasonably
assured.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company's ability to realize the deferred tax asset is
assessed throughout the year and a valuation allowance is established
accordingly.
NOTE 6 - EARNINGS PER COMMON SHARE
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options and warrants using the "treasury stock"
method. The components of basic and diluted earnings per share are as follows:
Three Months Ended March 31,
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2004 2003
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(In thousands, except share and per share data)
Numerator for basic and diluted net earnings per common share:
Net earnings $ 6,399 $ 5,033
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Denominator:
Weighted average outstanding shares of common stock 23,121,054 22,291,340
Dilutive effect of:
Employee stock options 2,184,999 2,140,476
Warrants 258,285 265,442
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Common stock and common stock equivalents 25,564,338 24,697,258
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Net earnings per share:
Basic $ 0.28 $ 0.23
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Diluted $ 0.25 $ 0.20
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-8-
NOTE 7 - ACQUISITIONS
In March 2004, the Company completed two acquisitions. In the first
acquisition, we purchased substantially all of the assets and operations of The
Electric Mail Company Inc. ("Electric Mail"), a Canadian-based provider of
outsourced email and value-added messaging services. In the second acquisition,
we acquired all of the issued and outstanding shares of capital stock of Jump
B.V. ("Jump"), a Netherlands-based provider of fax-to-email and unified
messaging services. The aggregate purchase price for these two acquisitions was
US$6.0 million, payable in cash at closing, with a contingent earn-out based on
future revenues with respect to the Jump acquisition. The transactions have been
accounted for using the purchase method and, accordingly, the results of
operations of Electric Mail and Jump have been included in the consolidated
results of the Company since the date of acquisition. The excess of the purchase
price over the fair value of identifiable net assets acquired amounted to
approximately US$5.2 million. As of the date of this report, the Company has not
completed the allocation of excess purchase price between goodwill and
identifiable intangible assets. The results of operations for Electric Mail and
Jump during periods prior to our acquisition were not material to our
consolidated results of operations and accordingly, pro forma results of
operations have not been prepared.
NOTE 8 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
Intangible assets are recorded at cost, less accumulated amortization.
Amortization of intangible assets with finite lives is provided over their
estimated useful lives ranging from 30 to 96 months on a straight-line basis.
Amortization expense, included in general and administrative expense, during the
quarters ended March 31, 2004 and 2003 approximated $78,000 and $25,000,
respectively. Goodwill and a trade name with an indefinite useful life are
recorded net of accumulated amortization through December 31, 2001. As of March
31, 2004, intangible assets with finite lives, goodwill and trade name balances,
net of accumulated amortization were as follows:
Amortization Historical Accumulated
period cost amortization Net
---------------- -------------- ------------ -----------
(In thousands)
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
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Acquired product technology rights:
Patent 96 months $ 1,005 $ 235 $ 770
Customer relationships and software 30-60 months 293 90 203
INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION
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Goodwill 15,616
Indefinite-lived trade name 1,268
OTHER
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Unallocated - refer to Note 7 5,225 -- 5,225
NOTE 9 - INCOME TAXES
Income tax expense amounted to approximately $3.8 million and $235,000 for
the three months ended March 31, 2004 and 2003, respectively. In the first
quarter of both 2004 and 2003, the Company recorded the tax benefit from the
exercise of non-qualified employee stock options as a reduction of its income
tax liability and an increase in equity in the amount of approximately $369,000
and $203,000, respectively. During the quarter ended March 31, 2004, deferred
income taxes decreased by $3.2 million primarily due to the offset of the
Company's tax liability against available net operating loss and the tax credit
carry-forwards.
For 2004, we estimate our worldwide effective tax rate to be approximately
37%, assuming current worldwide tax rates.
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NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the quarters ended March 31, 2004 and 2003
approximated $19,000 and $15,000, respectively, substantially all of which
related to long-term debt and capital leases.
The Company paid cash of approximately $330,000 and zero, respectively, for
income taxes during the quarters ended March 31, 2004 and 2003.
During the first quarter of 2003, the Company entered into a capital lease
and loan arrangements for certain computer equipment and software. Equipment and
software acquired under capital leases and acquired under loan arrangements
approximated $422,000 and $240,000 as of March 31, 2004 and 2003, respectively.
In the first quarter of both 2004 and 2003, the Company recorded the tax
benefit from the exercise of non-qualified stock options as a reduction of its
income tax liability and an increase in equity in the amount of approximately
$369,000 and $203,000, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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ORGANIZATION AND DESCRIPTION OF BUSINESS
j2 Global Communications, Inc. ("j2 Global", "Our" or "We") is a Delaware
corporation founded in 1995. We provide outsourced, value-added messaging and
communications services to individuals and businesses around the world. We offer
fax, voicemail and email solutions, unified messaging & communications services,
document management solutions and conference calling services. We market our
services principally under the brand names eFax(R), jConnect(R), JFAX(R), eFax
Corporate(R), jBlast(R), eFax BroadcastTM, PaperMaster(R), ConsensusTM, M4
InternetTM, ProtoFax(R) and Electric MailTM. We deliver our services through our
global telephony/Internet Protocol ("IP") network, which offers local telephone
numbers in more than 1,300 cities in 20 countries across 5 continents.
Our core services, each of which operates in large and distinct markets,
include fax, voicemail, email, unified messaging & communications, document
management and conference calling. Individuals and businesses are already using
these services. Our challenge, therefore, is not to introduce new services to
prospective customers. Rather, it is to communicate to prospects how our
particular solutions are more secure, efficient and cost-effective than
traditional alternatives. In addition, we offer permission-based, personalized
email marketing services to help third parties maximize their advertising
efforts, and third party advertising services to our Free base of customers
(described below).
We operate in one reportable segment: value-added messaging and
communications services, which provides for the delivery of fax, voice and email
messages via the telephone and/or Internet networks. Our services are
distributed worldwide primarily over the telephone and Internet networks, and
thus, we do not consider our operations subject to any geographic segment
reporting.
We generate a substantial portion of our revenues from subscribers that pay
us for activation, subscription and usage fees. Activation and subscription fees
are referred to as "fixed" revenues, while usage fees are referred to as
"variable" revenues. We also generate a small percentage of our overall revenue
from advertising to non-paid subscribers (sometimes referred to as "Free"
subscribers). These Free advertising-supported subscribers also serve as a
significant source for attracting new paid subscribers. This process of
migrating advertising-supported customers to paid services is part of our life
cycle management program. Through this program, we monitor usage levels of
advertising-supported customers, send them promotional up-sell messages and cull
out subscribers that do not adhere to the limitations on our Free services set
forth in our customer agreements.
Of the more than 6.3 million telephone numbers (sometimes referred to as
Direct Inward Dial numbers or "DIDs") deployed as of March 31, 2004,
approximately 435,000 were deployed to paying subscribers, with the balance
deployed to Free advertising-supported subscribers.
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During the past three years, we have derived substantially all of our
revenues from the sale of our eFax Plus(R) and jConnect Premier(R) paid
services. These services are deployed through a DID. As a result, we believe
that paying DIDs and the revenues associated therewith are an important metric
for understanding our business. It has been and continues to be our objective to
increase the number of paying DIDs through a variety of distribution channels,
marketing arrangements and enhanced brand awareness. In addition, we
continuously seek to increase revenues through a combination of stimulating use
by our customers of usage-based services, introduction of new services and
instituting appropriate price increases to our fixed monthly subscription and
other fees.
The following table sets forth key operating metrics of our Company for the
three months ended March 31, 2004 and 2003:
March 31,
2004 2003
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(In thousands except average monthly revenue
per paying telephone number and percentage)
Advertising-supported telephone numbers 5,843 4,321
Paying telephone numbers 435 305
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Total active telephone numbers 6,278 4,626
Subscriber revenues:
Fixed $ 16,021 $ 9,916
Variable 6,041 4,538
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Total subscriber revenues $ 22,062 $ 14,454
Percentage of total subscriber revenues:
Fixed 72.6% 68.6%
Variable 27.4% 31.4%
Revenues:
DID based revenues $ 21,664 $ 14,062
Non-DID based revenues 1,278 1,146
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Total revenues $ 22,942 $ 15,208
========== ==========
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements. Actual results could
differ significantly from those estimates under different assumptions and
conditions. We believe that the following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results and require management's most difficult,
subjective and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
REVENUE RECOGNITION. Our revenue consists substantially of monthly
recurring and usage based subscription fees. In accordance with Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" which clarifies certain existing accounting
principles for the timing of revenue recognition and classification of revenues
in the financial statements, we defer the portions of monthly recurring and
usage based fees collected in advance and recognize them in the period earned.
Additionally, we defer and recognize subscriber activation fees and related
direct incremental costs over a subscriber's estimated useful life.
VALUATION OF DEFERRED TAX ASSETS. Our valuation allowance is reviewed
quarterly based upon the facts and circumstances known at the time. In assessing
this valuation allowance, we review historical and future expected operating
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results and other factors to determine whether it is more likely than not that
deferred tax assets are realizable. Based upon its expected continued
profitability in the first quarter of 2004 and, based on current information,
for the foreseeable future, the Company anticipates that it will meet the "more
likely-than-not" criteria for recognition of deferred tax assets.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
REVENUES
SUBSCRIBER REVENUES. Subscriber revenues are comprised primarily of monthly
recurring subscription and usage based fees. Subscriber revenues were $22.1
million and $14.5 million for the three months ended March 31, 2004 and 2003,
respectively. The increase in subscriber revenues was due to an increase in our
paying subscribers combined with a price increase discussed below. The increase
in paid subscribers was the result of new sign-ups derived from word-of-mouth,
Internet advertising, inside and outside sales forces and conversions of
existing Free advertising-supported customers to paid services. We believe that
the increased number of paying subscribers over this period was also due, in
part, to increased customer retention rates resulting from enhanced service
quality, service enhancements that deliver increased value to our customers and
more responsive and effective customer support services.
At the end of the second quarter of 2003, we began implementing a price
increase to our new individual subscribers. Commencing at the end of the third
quarter of 2003, we began implementing this same price increase to a substantial
portion of our existing subscribers. These price changes resulted in increased
monthly recurring revenues of between $2.50 and $3.00 per paying customer,
depending on the services provided. As of March 31, 2004, implementation of the
price change to existing customers was substantially complete. The results of
these price changes exceeded our expectations in terms of the rate of sign-ups
and cancellations (i.e., we did not see a material decrease in new customer
sign-ups and cancellations of existing subscribers were lower than anticipated).
However, due to a number of factors affecting the Company's net sign-ups and
related revenues during a given reporting period, it is not possible to quantify
the financial impact of the price increase.
ADVERTISING. Advertising revenues were $761,000 and $612,000 for the three
months ended March 31, 2004 and 2003, respectively. We generate advertising
revenues primarily by delivering email messages on behalf of advertisers to our
Free advertising-supported customers. The increase in advertising revenues was
due primarily to an increase in the size of our Free advertising-supported
customer base.
LICENSING AND OTHER. Licensing and Other revenues were $119,000 and $142,000 for
the three months ended March 31, 2004 and 2003, respectively. For the three
months ended March 31, 2004 and 2003, our Licensing and Other revenues consisted
primarily of revenues from licensing our PaperMaster document management
software. The decrease in our Licensing and Other revenues resulted from the
expiration of the consumable product licensing arrangements, combined with
relatively stable revenues from licensing PaperMaster.
COST OF REVENUES. Cost of revenues is comprised primarily of costs associated
with data and voice transmission, telephone numbers, customer service, on-line
processing fees and equipment depreciation. Cost of revenues was $3.6 million,
or 16% of total revenues, and $3.0 million, or 20% of total revenues, for the
three months ended March 31, 2004 and 2003, respectively. The increase in cost
of revenues was due primarily to costs incurred in building and expanding our
network infrastructure, enhancing and growing our customer support services, and
incurring increased variable transmission costs associated with a larger
subscriber base and increased usage.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses are comprised primarily of
payments to sales and marketing personnel, advertising expenses and other
business development related expenses. Sales and marketing expenses were $3.8
million, or 16.5% of total revenues, and $2.5 million, or 16.5% of total
revenues, for the three months ended March 31, 2004 and 2003, respectively. The
increase in sales and marketing expenses was due primarily to increased
Internet-based advertising and additional marketing personnel. Our
Internet-based advertising relationships consist primarily of fixed cost and
performance-based (cost-per-impression, cost-per-click, and
cost-per-acquisition) advertising relationships with an array of on-line service
providers. During the second half of 2003, we experienced upward pricing
pressure for Internet-based advertising, and we expect this trend to continue
through at least the balance of 2004.
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RESEARCH, DEVELOPMENT AND ENGINEERING. Our research, development and engineering
costs consist primarily of personnel related expense. Research, development and
engineering costs were $1.1 million, or 5% of total revenues, and $1.0 million,
or 7% of total revenues, for the three months ended March 31, 2004 and 2003,
respectively. The increase in research, development and engineering costs was
primarily due to an increase in personnel costs to maintain our existing
services, accommodate our service enhancements, develop and implement additional
service features and functionality and continue to bolster our infrastructure
security. Research, development and engineering costs as a percentage of
revenues decreased as a result of increases in revenues over the same periods
versus a more stable level of research, development and engineering expenses.
GENERAL AND ADMINISTRATIVE. Our general and administrative costs consist
primarily of personnel related expenses, depreciation and amortization, bad debt
expense and insurance costs. General and administrative costs were $4.5 million,
or 20% of revenues, and $3.5 million, or 23% of revenues, for the three months
ended March 31, 2004 and 2003, respectively. General and administrative costs as
a percentage of revenues decreased as a result of increases in revenues over the
same periods and general and administrative costs increased at a slower rate
than revenues.
AMORTIZATION OF OTHER INTANGIBLES. Amortization of intangible assets with finite
lives is provided over their estimated useful lives ranging from 30 to 96 months
on a straight-line basis. Amortization of intangibles, included in general and
administrative expenses, aggregated $78,000 and $25,000 for the three months
ended March 31, 2004 and 2003, respectively.
INTEREST AND OTHER INCOME. Our interest and other income is generated from
interest earned on cash, cash equivalents and short- and long-term investments.
Interest and other income amounted to $186,000 and $74,000 for the three months
ended March 31, 2004 and 2003, respectively. The increase in interest and other
income was primarily due to higher cash and investment balances for 2004.
INCOME TAXES. Income tax expense amounted to approximately $3.8 million and
$235,000 for the three months ended March 31, 2004 and 2003, respectively. In
the first quarter of both 2004 and 2003, the Company recorded a tax benefit from
the exercise of non-qualified employee stock options as a reduction of its
income tax liability and an increase in equity in the amount of approximately
$369,000 and $203,000, respectively. For the quarter ended March 31, 2003,
income tax expense was substantially offset by net operating loss carry-forwards
for which a valuation allowance had previously been recognized against the
deferred tax assets.
Income tax expense for the three months ended March 31, 2004 is based on our
worldwide estimated effective tax rate of 37%.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents and short-term investments were $53.4 million
at March 31, 2004. Our primary sources of liquidity are cash flows generated
from operations, together with cash and cash equivalents and short-term
investments. Net cash provided by operating activities was $10.2 million and
$5.3 million for the three months ended March 31, 2004 and 2003, respectively.
Our operating cash flows result primarily from cash received from our
subscribers, offset by cash payments we make to third parties for their services
and employee compensation. More than two-thirds of our subscribers pay us by
using their credit cards and therefore our receivables from subscribers settle
quickly. We invest our short-term and long-term investments primarily in
high-grade debt securities. Allocations of our total cash and cash equivalents
and short and long-term investments on hand will generally vary during any given
reporting period based on our short-term working capital requirements and return
on investment opportunities.
Net cash used in investing activities was approximately $9.9 million and
$393,000 for the three months ended March 31, 2004 and 2003, respectively. For
the first quarter of 2004, net cash used in investing activities was primarily
attributable to purchases of investments, purchases of furniture, fixtures,
equipment, purchase of intangible assets and acquisitions of businesses. For the
first quarter of 2003, net cash used in investing activities was primarily
comprised of purchases of furniture, fixtures and equipment and the acquisition
of a business, offset by proceeds from the sale of equipment.
Net cash (used in) provided by financing activities was approximately
($289,000) and $1.0 million for the three months ended March 31, 2004 and 2003,
respectively. Net cash provided by financing activities in 2004 was comprised
primarily of proceeds from the exercise of stock options, warrants and common
shares issued under our employee stock purchase plan, offset by repayments of
debt and capital lease obligations. For the first quarter of 2003, net cash
provided by
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financing activities was primarily comprised of proceeds from the exercise of
stock options and common shares issued under our employee stock purchase plan,
offset by repayment of debt and capital lease obligations.
We have an investment with an immaterial carrying amount in Oasis
Semiconductor, Inc. ("Oasis"), a privately-held company. This investment in an
equity security is accounted for under the cost method and is included in "other
assets" on our consolidated balance sheet. In March 2004, Oasis filed a
registration statement on Form S-1 with the United States Securities and
Exchange Commission regarding its intent to initiate an initial public offering
("IPO"). On April 27, 2004, Oasis filed an amended registration statement on
Form S-1 indicating our intent to sell approximately 420,000 shares in the
offering, resulting in us owning slightly under 10% of Oasis' issued and
outstanding shares of capital stock after the offering. However, we are unable
to determine when and if Oasis will complete the IPO, and if so, at what
offering value. If this offering were to be completed, our carrying value or
related proceeds from the offering may become material.
We currently anticipate that our existing cash and cash equivalents and
short-term investment balances will be sufficient to meet our anticipated needs
for working capital and capital expenditures for at least the next 12 months.
CONTRACTUAL OBLIGATIONS AND COMMERICAL COMMITMENTS
The following table summarizes our obligations and commitments as of March
31, 2004:
PAYMENTS DUE BY PERIOD
----------------------
(IN THOUSANDS)
--------------
LESS
THAN 1 2-3 4-5 AFTER 5
CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- ---------------------------- -------- -------- -------- -------- --------
Long-term debt $ 443 $ 270 $ 173 $ -- $ --
Capital leases 422 260 162 -- --
Operating leases 5,163 1,038 1,767 1,690 668
Telecom services and co-location facilities 951 693 247 11 --
Marketing agreements 520 520 -- -- --
Purchase obligation related to computer software 2,640 2,640 -- -- --
Advertising agreements 328 328 -- -- --
-------- -------- -------- -------- --------
$ 10,467 $ 5,749 $ 2,349 $ 1,701 $ 668
======== ======== ======== ======== ========
CAPITAL LEASING AND LOAN ARRANGEMENTS
We finance a portion of our operating technology equipment, software and
office equipment and certain insurance costs through capital lease and loan
arrangements. Our software, hardware and office equipment financing is secured
by the related assets. Our financing for insurance costs is unsecured. Amounts
due under these arrangements were approximately $865,000 and $1.2 million at
March 31, 2004 and December 31, 2003, respectively, with installments due
through June 2005 at interest rates ranging from 4.25% to 8.8% per annum. For
2004, we expect to increase our levels of financing under capital lease and/or
loan arrangements if we believe the cost of funds is attractive.
OPERATING LEASES
We lease certain facilities and equipment under non-cancelable operating
leases which expire at various dates through 2010. Future minimum lease payments
under operating leases as of March 31, 2004 for the remainder of the fiscal year
ending December 31, 2004 approximate $794,000.
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FORWARD-LOOKING INFORMATION
IN ADDITION TO HISTORICAL INFORMATION, THE FOREGOING MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTAINS FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS. THE ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED BELOW, THE RESULTS OF ANY
ACQUISITION WE MAY COMPLETE AND THE FACTORS DISCUSSED IN THE SECTION IN THIS
QUARTERLY REPORT ON FORM 10-Q ENTITLED "QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK". READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE
DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO REVISE OR PUBLICLY RELEASE THE
RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS. READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS DESCRIBED BELOW, THOSE IDENTIFIED IN THE "RISK
FACTORS" SECTION OF OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") ON MARCH 15, 2004 AND THE RISK FACTORS SET FORTH IN
OTHER DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SEC.
Some factors that could cause actual results to differ materially from
those anticipated in these forward-looking statements include, but are not
limited to, our ability to:
o Sustain growth or profitability;
o Continue to maintain, expand and retain our customer base;
o Compete with other similar providers with regard to price, service
and functionality;
o Cost-effectively procure large quantities of telephone numbers in
desired locations in the United States and abroad;
o Obtain large quantities of non-paying users on a cost effective
basis, and effectively derive revenues from those users through
advertising to them and selling them paid services;
o Successfully manage our cost structure, including but not limited
to our telecommunication and personnel related expenses;
o Successfully adapt to technological changes in the messaging,
communications and document management industries;
o Successfully protect our intellectual property and avoid infringing
upon the proprietary rights of others;
o Adequately manage growth in terms of managerial and operational
resources;
o Maintain and upgrade our systems and infrastructure to deliver
acceptable levels of service quality and security of customer data
and messages;
o Introduce new services and achieve acceptable levels of
returns-on-investment for those new services; and
o Recruit and retain key personnel.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion of the market risks we face contains
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements.
We believe that our exposure to market risk related to changes in interest
rates and foreign currency exchange rates is not significant, primarily because
our indebtedness under financing arrangements has fixed interest rates and our
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transactions are substantially denominated in US Dollars. During 2004 and future
years, we believe we will expand our international customer base and, as a
result, we expect a greater level of foreign currency market risk.
We invest our cash primarily in high-grade interest-bearing securities. Our
return on these investments is subject to interest rate fluctuations.
We do not have derivative financial instruments for hedging, speculative or
trading purposes.
Item 4. Controls and Procedures
- -----------------------------------
As of the end of the period covered by this report, j2 Global's management,
with the participation of our President (principal executive officer) and Chief
Financial Officer (principal financial officer), carried out an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934). Based upon that
evaluation, our President (principal executive officer) and Chief Financial
Officer (principal financial officer) concluded that these disclosure controls
and procedures were effective as of the end of the period covered in this
report. In addition, no change in our internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934)
occurred during the first quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
-16-
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings
- -----------------------------
We are not currently aware of any legal proceedings or claims that we
believe are likely to have a material adverse effect on our business, prospects,
financial condition, results of operations or cash flows.
In February 2004, we filed a patent infringement suit against Venali, Inc.
("Venali"), a Florida-based provider of Internet fax solutions to businesses,
alleging that Venali violates two of our U.S. patents. We are seeking remedies
in the form of monetary damages for past infringement, as well as injunctive
relief prohibiting Venali from continuing to infringe these patents.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
A. Exhibits
31(a) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
Item Description Filing Date
---- ----------- -----------
7,9 Regulation FD disclosure regarding January 8, 2004
j2 Global's presentation at The
Sidoti & Company, LLC First Annual
Emerging Growth Institutional
Investor Forum.
5,7 Press release announcing signing of January 23, 2004
definitive agreement to acquire
substantially all of the assets and
operations of The Electric Mail
Company Inc.
7,9 Regulation FD disclosure regarding January 23, 2004
financial guidance for fiscal year
2004.
7,9,12 Regulation FD disclosure regarding February 3, 2004
2003 financial fourth quarter and
fiscal year results, financial
estimates for first quarter and
fiscal year 2004, and February 2004
Investor Presentation.
5,7 Press release announcing filing March 4, 2004
of patent infringement suit against
Venali, Inc.
7,9 Regulation FD disclosure regarding j2 March 16, 2004
Global's presentation at the
Montgomery Technology Conference.
5,7 Press release announcing closing of March 22, 2004
acquisition of substantially all of
the assets and operations of The
Electric Mail Company Inc.
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5,7 Press release correcting purchase March 24, 2004
price set forth in March 22, 2004
press release regarding The Electric
Mail Company Inc. acquisition.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
j2 Global Communications, Inc.
Date: May 10, 2004 By: /s/ R. SCOTT TURICCHI
-----------------------------
R. Scott Turicchi
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2004 By: /s/ GREGGORY KALVIN
-----------------------------
Greggory Kalvin
Chief Accounting Officer
(Principal Accounting Officer)
-19-
INDEX TO EXHIBITS
- -----------------
Exhibit Number Description
-------------- -----------
31(a) Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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